Schafer: Medtronic's $1B fumble could chill risk-taking

The recent collapse of Medtronic’s clinical trial for a blood pressure treatment device marks another watershed as the era of dynamic growth through invention comes to a close in the medi­cal device industry.

Yes, it’s just one patient trial for one product. But it’s not every day that doubts about whether a medical device actually works take a billion-dollar acquisition down more or less to zero.

Fridley-based Medtronic has been measured in what it has said, just that it stopped its large pivotal trial of its Symplicity HTN-3 renal denervation product because the results so far showed that it “failed to meet its primary efficacy endpoint,” or wasn’t effective enough at treating hypertension. Medtronic got the product in a 2011 acquisition of a start-up called Ardian, so it added that a write-down of the value of the related assets is “likely.”

Medtronic is still selling the product for use in some countries and may yet get something more out of the deal. It’s appointing a panel of experts to look over the trial, so it’s possible that the panel will find flaws in the trial itself and Medtronic will try again.

In conversations with investors and device executives in the last week, however, no one sounded particularly optimistic that Medtronic had anything here but a complete bust.

And if this can happen to Med­tronic, the old assumptions about acceptable risk in medical technology need to be reconsidered and the already long road from invention to product launch just got a whole lot longer.

Companies like Medtronic and St. Jude Medical have been calculated risk takers, and the risk they don’t ­usually take is technical risk. The device has to work.

But there’s also an important distinction to be made between technical risk and clinical risk, and it was clinical risk that derailed the Symplicity device. All indications are that the devices do zap the renal nerves as designed, but doing so did not show enough effect on patient blood pressure.

The thing to remember is that Medtronic hadn’t been waiting around for results of this trial to figure out if the device worked clinically, either. This big trial was the end of a long process of testing.

Ardian first jumped into the spotlight with a November 2010 presentation at an American Heart Association meeting, reporting that use of its device dropped the average blood pressure from 178 over 97 to 146 over 85 in a study of 106 patients after six months of follow-up.

As owner of 11.3 percent of the company, Medtronic had a front-row seat for this exciting development. Within a week of the presentation the acquisition was announced, and when it closed in January 2011 Medtronic had paid $717 million for the 89 percent it didn’t already own and agreed to make future payments based on revenue that brought the total deal value to $1 billion.

A venture capitalist in the deal later called it the biggest sale price ever for a company whose main product hadn’t been approved by the Food and Drug Administration.

The economic case was an easy one. Renal denervation could bring down high blood pressure for people who can’t control it with medications. That’s maybe as many as a third of the 1 billion or more people worldwide with hypertension, enough to make renal denervation products a projected multibillion-dollar market opportunity.

Piper Jaffray & Co. analyst Thom Gunderson called Medtronic’s deal “a measured, well-thought-out swing for the fences. Or if I am to stay in ­season, the long pass or the three-pointer from downtown.”

Gunderson is one of the most sensible analysts in the investment business, and put that way it’s not that shocking that Medtronic’s long three-pointer clanged off the rim. On the other hand, missing the winning shot can make a shooter more hesitant the next time.

Bad news at a tough time

Pete McNerney, a veteran venture capitalist, explained that the industry needs its big companies to be aggressive buyers. It’s the only way investors in start-ups can ever get their money back.

“When the big companies get a lot more cautious and back off and want to see more data, it just extends the timelines and requires more capital,” he said. “It just makes it tougher.”

It was already tough enough: Venture investing in the industry was projected to be down in 2013 more than 40 percent from 2007. Venture capital partnerships have limited lives, usually 10 years. One reason medical technology investing has declined is that the venture partners worry that their funds won’t live long enough to ever see a return.

Ardian got its first venture funding in 2003 and agreed to be acquired at the end of 2010. More than three years later, its product was still grinding toward FDA approval.

Larger medical device companies have been busy harvesting the companies seeded by the venture capitalists five or 10 years ago. With venture capital investing down, it remains to be seen how many promising companies won’t be available for them to buy in three or five years.

Medtronic, through a spokeswoman, referred to comments that CEO Omar Ishrak made last week to investors at the annual JPMorgan health care conference in San Francisco.

Ishrak told investors that the failed Symplicity trial “does not change our overall outlook, our strategic outlook, for Medtronic.” He quickly moved on to deliver an upbeat talk on the themes of improving operational excellence, building simpler products for emerging markets and focusing innovation on the economic value of Medtronic products.

These are sound ideas but still not quite the kind of inspiring notion that animated a CEO’s talk in the past, when the company was inventing a device to save lives and then making a lot of money by selling it.

That old model is slowly dying, and a flop like Symplicity is more a symptom of what’s killing it rather than a cause. It’s one that will be very well remembered.

Lee Schafer came to the Star Tribune after 15 years as a corporate officer, consultant and investment banker in the Twin Cities. He has been a columnist for Twin Cities Business magazine and was senior editor for Corporate Report Minnesota. Follow @LeeASchafer